Posts Tagged ‘Common Agricultural Policy’

The European Parliament, Council and Commission have agreed on reform to the Common Agricultural Policy as part of the EU’s long-term budget settlement for 2014–20. The CAP accounts for some 38% of the EU’s budget and, over the years, has drawn considerable criticism for resulting in food mountains and support being biased towards large intensive farms.

As section 3.5 in Economics (8th ed) explains, the CAP has been through a number of reforms since the early 1990s. Prior to that, the main form of support was that of guaranteed minimum prices backed up, where necessary, by levies (tariffs) on imported food. Any surplus of production at the minimum price was bought by the relevant EU Intervention Board and either stored or exported at world prices. The effect of minimum prices is shown in the diagram.

Assume that the EU demand is DEU and that EU supply is SEU. Assume also that the world price is Pw. This will be the equilibrium price, since any shortage at Pw (i.e. b – a) will be imported at that price. Thus before intervention, EU demand is Qd1 and EU supply is Qs1 and imports are Qd1 – Qs1.

Now assume that the EU sets an intervention price of Pi. At this high price, there will be a surplus of d – e (i.e. Qs2 – Qd2). Assume for the moment that none of this surplus is exported. It will all, therefore, be bought by the appropriate Intervention Board. The cost to the EU of buying this surplus is shown by the total shaded area (edQs2Qd2: i.e. the surplus multiplied by the intervention price). Unless the food is thrown away, exported or otherwise disposed of, there will obviously then be the additional costs of storing this food: costs that were very high in some years as wine ‘lakes’ and grain and dairy ‘mountains’ built up. If, however, the surplus is sold on world markets at the world price Pw, this will earn the green area for the EU, leaving a net cost of just the pink area.

From 1992, there was a gradual move towards lowering intervention prices and paying farmers direct aid unrelated to current output. From 2004, the main form of support became these direct aid payments. Annual payments to each farm were based on the average support it had received over the three years from 2000 to 2002. At the same time, payments to large farms were gradually reduced, with 80 per cent of the money saved in each country being diverted to rural development. Payments were also made conditional on farmers making environmental improvements to their land.

A problem with this system is that farmers who had high average output in the years 2000–2 have been receiving the same large payments ever since, while farmers who had small yields in those years have received correspondingly small payments.

A proposal two years ago by Dacian Cioloş, the EU Commissioner for Agriculture, was for flat-rate payments per hectare. But objections were raised that this would benefit inefficient farmers who would receive the same as efficient ones. In the end a compromise agreement was reached which saw a capping of the amount of payment per hectare. The result is that the most intensive farmers will see a reduction in their payments by some 30% – a process that will happen gradually over the period 2014–19.

In addition it has been agreed that 30% of the direct aid payments will be conditional on farmers adopting various measures to protect the environment and wildlife.

Farmers will have to be ‘active’ producers to receive direct aid payments. This is designed to exclude businesses such as airports or sports clubs, some of which had been receiving support under the previous system.

It was also agreed to provide 25% extra support for five years to farmers under 35 in an attempt to attract more young farmers into agriculture. Other details of the settlement are given in the EU documents, videos and articles below.

Why will a system of agricultural support based solely on direct aid not result in any food mountains?

Show in a diagram the effect of high minimum prices (plus import levies) on an agricultural product in which a country is not self-sufficient (and is still not made so by the high minimum price). How much will be imported before and after the intervention?

What are the arguments for and against making direct aid payments based solely per hectare?

Find out how sugar quotas have worked. What will be the effects of abolishing them by 2017?

What ‘green’ measures are included in the agreement and how effective are they likely to be?

Consider the arguments for and against removing all forms of support for agriculture in the EU.

What are the effects of (a) price support and (b) direct aid payments unrelated to output for EU farmers on farmers in developing countries producing agricultural products in competition with those produced in the EU?

Why may the environmental measures in the new agreement be seen as too weak?

The total EU budget in 2010 was €123 billion. Just under half of this (€58 billion) was spent on supporting agriculture. The programme of support – the Common Agricultural Policy (CAP) – has changed over the years. For a start, despite its being a large proportion of the EU budget, this proportion has actually been falling. In 1980, the CAP accounted for 69% of the EU budget; in 1990 it was 60%; in 2000 it was 52%; in 2010 it was 47%.

The types of support have also changed. The main method in the past was effectively to set minimum prices for various foodstuffs and for Intervention Boards to buy up any surpluses that arose from such prices being above the market equilibrium. Massive food ‘mountains’ resulted. Sometimes these surpluses were dumped on the world market; sometimes they were thrown away; sometimes they were simply kept in storage. Export subsidies and import levies (taxes) were also used to reduce surpluses. This, of course, was highly damaging to farmers in many countries outside the EU, especially in various primary exporting developing countries.

Reforms have taken place in recent years. The most important has been to replace high intervention prices with direct payments to farmers unrelated to current output. Whilst such payments still provide a substantial outgoing from the EU budget, being unrelated to current output, they do not encourage farmers to produce more and thus do not generate surpluses. Prices in most cases are allowed to be determined by the market.

The EU has just announced further reforms. These include:

• Capping total CAP spending at current levels until 2020• Capping the total payment to any one farm to €300,000• Relating subsidies to acreage rather than previous output• Making 30% of the direct payments dependent on farmers meeting environmental criteria.

The following videos and articles examine the proposals and assess their likely benefits, their likely drawbacks and their likelihood of being implemented.

The European Commission is concerned that the economic downturn may have put the livelihoods of dairy farmers at risk. To try to prevent any problems for farmers, the Commission has re-introduced export subsidies for dairy products. The last time subsidies were paid to dairy farmers was June 2007 and the EU insists that the payment will meet World Trade Organisation (WTO) rules.

Using diagrams as appropriate, illustrate the impact of the EU export subsidies on the market for milk.

Additional support for dairy farmers comes in the form of EU intervention – European Commission purchases of surplus produce at a guaranteed price. Using diagrams as appropriate, illustrate and explain how this ‘guaranteed price’ scheme will work.

Explain the role of the WTO in determining world trade rules.

Discuss the likely reaction of other countries to the EU’s payment of export subsidies to dairy farmers.

Increased demand for milk and milk-based products has led to the EU agreeing to increase milk quotas by 2% from April. The move was backed by most countries but Germany and Austria opposed the move on the basis that increased quotas would push milk prices down and therefore hit many farmers.

Using diagrams as appropriate, show how EU milk quotas affect the equilibrium price and level of output in the market for milk.

2.

Analyse the likely impact of a 2% increase in quotas on the equilibrium price and level of output in the market for milk. (n.b. as part of your answer you may like to consider the likely value of the price elasticity of demand for milk and the impact this is likely to have on the market price.)

3.

Discuss the effectiveness of using milk quotas in maintaining income levels for dairy farmers.